Maintaining its Monetary Policy Actions, CBN Cuts OMO, Primary Market Auctions to N2.99trn

Kayode Tokede

As part of maintaining its monetary policy actions with the aim of reducing the money supply in the economy, improving the liquidity of the macro economy, the Central Bank of Nigeria (CBN), has reduced the open market (OMO) and primary market auctions at N2.99 trillion in the first four months of 2022, CBN financial data has revealed.

The CBN, in its financial data for the first four months of 2022, revealed that it auctioned 2.99 trillion naira of government papers between January and April 2022, indicating a decline of 17.3% compared to 3.62 trillion naira between January and April 2021.

Analysis of financial data revealed that while primary market bidding increased by 24% between January and April 2022 to 2.42 trillion naira from 1.95 trillion naira in the previous period of 2021, OMO auctions fell by 66% to 570 billion naira from 1.66 naira. trillion recorded between January and April 2021.

OMO refers to the CBN’s practice of buying and selling securities on the open market to regulate the supply of reserve money in banks. Whenever the apex bank deems the inflation rate to be high due to the increase in the money supply, it sells OMO in the secondary market to mop up the excess liquidity in the system.

For auctions on the primary market, this is a market on which new issues of government securities are available for sale.

Meanwhile, a monthly breakdown revealed that in January, CBN held a primary market auction worth 472.8 billion naira and it rose to 778.21 billion naira and 880, 34 billion naira between February and March 2022 respectively. For April, a total of N289.1 billion was auctioned in the primary market by CBN.

However, for the OMO, CBN auctioned 130 billion naira in January and it increased further to 2.709 billion naira. OMO auctions fell 58% to N120 billion in March and further depreciated to N50 billion in April 2022.

But some analysts attributed the low liquidity in the economy to the drop in OMO auctions in 2022.

They argued that the purpose of the OMO is to adjust the monetary policy of the CBN and ensure that there is not enough money in the economy to drive up inflation and price stability.

Financial market analyst and Vice Chairman of Highcap Securities Limited, Mr. David Adnori, in a conversation with THISDAY, attributed the drop in OMO auctions to low liquidity in the macro economy.

He explained that the CBN primary market auctions in 2022 are due to increased federal government borrowing to finance the budget deficit, now that the interest rate in these money markets is attracting investors.

According to him, “The CBN sells treasury bills on two market platforms and the first auction of the primary market and the secondary market platform called OMO. The secondary market has a market where banks and other licensed brokers exchange treasury bills among themselves.

“From time to time, from its monetary policy implementations of increasing or decreasing the money supply in the economy, the CBN has intervened in the secondary market called the OMO market auction.”

He added: “When CBN buys OMO it means they wanted to stabilize the economy. Then if there is so much money in the economy, then enters the secondary market, which is OMO and sells to take money out of the system. The objective is to improve the liquidity of the macroeconomy. This year, the OMO auction means there is no excess liquidity in the economy for CBN to auction.

For his part, PAC Holdings analyst, Mr. Wole Adeyeye, said weak CBN business in the OMO market was due to the slowdown in economic activities, saying banks were concerned about lending. to the real sector as required by the regulator.

He further explained that “we are seeing weak activity in the money market and auctions in the OMO market should be no exception.”

Coronation Research analysts in their Markets Review, ‘Fixed Income Gains in Q1 2022’ report noted that Nigerian money markets in Q1 2022 proved to be liquid such that institutional investors subscribed in large volumes at auctions of Nigerian and federal government treasury bonds; “and they were also active in the secondary markets.”

According to the report, “the overall secondary market yield for a 1-year Treasury fell 0.76% (to 4.48% per annum) while the secondary market yield for the average of our basket of FGN bonds fell 1.61%. percent (at 10.21 percent per year).

“The CBN had restricted the access of Nigerian companies and individuals to the OMO market. Also, banks were not allowed to purchase Treasury bills on behalf of borrowing customers. OMO bonds had attracted a hefty interest rate of around 15% per annum, making it one of the most sought after securities in Nigeria and even in emerging markets, which explains why foreign investors hold close to half the size.

Additionally, analysts at Guaranty Trust Holding Company Limited (GTCO) in their 2022 Economic Outlook stated, “As we approach 2022, the general preparation for the 2023 election will most likely result in a system flooded with liquidity.

“We believe the apex bank will tighten the system from the second half of the year just as political campaigns begin, to mop up excess liquidity from the system. Although the CBN is unlikely to slow its CRR debits discretionary, we expect more banks to approach the apex bank for the release of some of their “excess” CRR to help fund their transactions, payment of regulatory levies/fees, etc.”

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